Wild swings too hot for traders who chase volatility

By Doris Frankel - Analysis

CHICAGO (Reuters) - Traders who have thrived on wild swings in market prices for decades are now having trouble staying on the unprecedented rollercoaster that is Wall Street.

The jerky swings in the Dow Jones industrial average has been compounded by the lack of liquidity, brought on by hedge funds which are being forced to reduce leveraged positions.

"The crash of 1987 was a picnic compared to what traders are seeing today," said Steve Claussen, chief investment strategist for online brokerage OptionsHouse, a subsidiary of options trading firm PEAK6 Investments LP in Chicago.

TrimTabs Investment Research estimated that investors yanked at least $43 billion (24.8 billion pounds) from hedge funds in September, reacting to their poor performance.

Hedge funds are not alone to blame for the volatility.

The credit markets, the lifeblood of economic growth, remain frozen and investors still doubt actions by the Federal Reserve and other world central banks will stave off a deep recession.

"As unfortunate as it is, this kind of volatility is 'natural' during a market crisis," said Joe Sunderman, senior market analyst at Ohio-based Schaeffer's Investment Research.

On Wednesday, the Dow industrials dropped 733 points in the biggest percentage decline since the crash of '87. On Thursday, the Dow closed up 400 points to end at 8979.26.